Barnacle effect’ holding retailers back from downsizing store portfolios as digital age demands strategic shift
Online sales already equivalent to more than 60 million square feet
10 September 2012
Retailers’ historic focus on preserving sales volumes and store numbers is holding them back from taking the steps necessary to downsize store portfolios, according to a new report from the business advisory firm, Deloitte. This ‘barnacle effect’, where retail management develops an attachment to absolute shop numbers, is in danger of putting some retailers’ survival at risk by not tackling the issue of excess physical space sooner.
Deloitte estimates that online sales already account for the equivalent of more than 60 million square feet of retail space. By the time online sales mature this could increase significantly, potentially rendering large amounts of space obsolete. Earlier this year, Deloitte forecast that some retailers would need to downsize portfolios by as much as 40% as the digital age drives fundamental structural change in the sector.
Hugo Clark, director in Deloitte’s real estate team and report author, says: “The death of the high street is far from being a reality, yet stores are now just one part of a larger, more connected customer experience and many retailers are struggling to define the relevance and future contribution of their physical space. Shops now represent a potentially clumsy, fixed point in an increasingly mobile world. In many cases, they are slow and costly to adapt, expensive to operate and difficult to relinquish once surplus to requirement.”
The challenge for retailers is to ensure the process of downsizing their portfolio is driven by strategy, not opportunity. This must be based on a clear vision of what the ideal footprint should look like, rather than simply cutting stores as and when leases expire. Retailers need to establish the business case for each store, map lease expiries against store performance and understand the potential impact on performance of future rental increases.
Clark added: “Reducing portfolios is not easy. Inflexible lease structures in particular mean that a decision to downsize store portfolios can take a considerable length of time to implement cost effectively. The mistake that many retailers make is waiting until the eleventh hour to rightsize their portfolio, when cash to support lease surrenders is not available.
“Well funded businesses should consider investing spare cash into negotiating surrenders of their poorest performing stores. While this is unlikely to be cheap, it may prove to be a good long term investment. Many retailers who don’t manage this approach proactively only consider consolidating their store portfolio under the shadow of a refinancing negotiation.”
‘Store only’ shopping, a purchase in store with no prior online research, remains the biggest single channel for non-food transactions accounting for 72% of total sales. Stores will remain a critical element in the multichannel world but whether acquiring new space, renewing existing leases or downsizing an existing retail portfolio, the flexibility of the physical space and its ability to adapt to changing retail models should be paramount.
Clark concluded: “Given the rapidly changing retail environment and the speed with which new technologies are emerging and impacting on the use of physical space, the biggest challenge facing retailers is to continually test and challenge the size, shape and purpose of their store portfolios. This is likely to be a constant but critical process of evolution for retailers seeking not just to survive but to flourish.”
Notes to editor:
Rightsizing the Retail Estate is the second in a series of reports from Deloitte bringing together emerging thinking on future trends in retailing and their real estate implications. The next report is [insert detail about final report]. The reports are the result of joint research by Deloitte’s Retail Consulting practice and its real estate practice, Drivers Jonas Deloitte.
In this press release references to Deloitte or Drivers Jonas Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
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